Earn-outs are back and drafted worse than ever

Earn-outs can bridge a valuation gap without forcing either side to concede its view of future performance at signing. That makes them attractive when trading conditions are uncertain, financing is more selective, or a business depends heavily on a small number of contracts or individuals.

The apparent compromise creates a new problem: the parties remain economically connected after control has changed. The buyer controls the business, while the seller depends on how that business is operated and measured. A sound structure must address that tension directly rather than leave it to broad obligations of good faith.

The parties should agree the commercial model before turning to detailed drafting. Revenue, EBITDA, customer retention, and milestone-based tests each reward different behaviour. The chosen measure must fit the business and be capable of consistent verification throughout the earn-out period.

An expert determination clause should identify which questions are accounting questions and which remain legal or contractual questions. It should also define the expert's powers, the evidence each party may submit, and the circumstances in which a manifest error can be challenged.

The strongest earn-out provisions are operational documents, not merely payment clauses. They tell the buyer how freedom of action will be preserved, tell the seller how performance will be measured, and give both sides a credible route to resolution before positions harden.